Cooper and Kaplan discuss the pros and cons of integrating an activity-based
cost system and an operational learning and control cost system to provide
on-line, real-time information. They say that some real-time information will be
beneficial, but some will also cause confusion and error, and deliver
information that is much more inaccurate than the information currently being received by managers. They advocate
that the two systems can only be partially integrated.

Different Systems, Different Costs

Purpose of the system - The
operational-control system provides information about process and
business-unit efficiencies, whereas the activity-based cost system provides
strategic cost information about the underlying economics of the business.

Definitions of cost - Cost in an
operational-control system measures actual expenses incurred in a
responsibility center, whereas in an ABC system costs are aggregated across
multiple cost and responsibility centers. The cost of a particular resource
would be a different number using the two different systems.

Scope and measurement demands - ABC is broader in scope and depends on standard rates and estimates, instead
of actual, real-time cost data when tracing costs. Operational control
requires more accuracy.

Exhibit 1
Differences between Operational Learning and Control and Activity-Based
Costing

Operational Learning
and Control

Activity-Based Costing

Overall purpose

Provides managers and operators with
economic feedback (financial and nonfinancial) about process
efficiencies and responsibility-center performance

Allows senior managers to assess product,
customer, and business-unit profitability by assigning costs based
on usage of company wide resources; also measures activity and
process costs and gauges capacity usage

Cost of resources used

Actual

Standard

Frequency of updating

Continual

Periodic (quarterly, semiannual, or annual)
or as sustainable changes occur

Measurement demands

Highly accurate

Estimates sufficient; more accuracy only
when cost justified

Scope of systems

Responsibility center

Entire value chain, from suppliers through
post-sales service

Definitions of costs

Expenses actually recorded in financial system.

Cost of resources used based on standard activity costs driver rates
and practical capacity of organization resources (difference between the
two definitions: the cost of unused capacity plus any short-term
spending variances).

Cost variability

Emphasis on short-term fixed and variability costs.

Degree of variability is not a central
feature; managers make almost all costs variable through
activity-based budgeting that matches resource supply to resource
demand

The Peril of Real-Time Data

The issue of substituting actual costs for
estimated costs in an ABC system is addressed. Cooper and Kaplan use an example
to illustrate that calculations involving actual costs would include
fluctuations in spending, volume, productivity, and yield, which are unrelated
to the underlying economics and productivity of activities and business
processes. Such fluctuations are said to result in errors in product and
customer costs, and in undetected improvement or deterioration in activities and
business processes, which could lead to misguided decisions being made by
managers. Managers might also be confused about the profitability of products
and customers as a result of such fluctuations.

The Promise of Integration

Cooper and Kaplan advocate that the
operational-control and ABC systems should exchange information about
efficiency, sustained operational improvements, and capacity usage. They
identify activity-based budgeting as being the crucial link between these two
systems. They feel that "one of the great promises of an integrated system
is that it brings activity-based budgeting within the practical reach of
managers". Activity based budgeting is said to give managers better control
over their cost structure, particularly in transforming so-called fixed costs
into variable ones. In contrast to the ABC "north-to-south" cost flow,
from resources through activities to products and customers, activity-based
budgeting uses a "south-to-north" cost flow through use of the
following five steps:

1. Estimate the
production and sales volumes for the next period.
2. Forecast
the demand for activities.
3. Calculate the resource demands.
4. Determine
the actual resource supply.
5. Determine
activity capacity.

Having budgeted the quantity and expense of
committed resources, the ABC system can then feed this information into the
operational control system, which monitors the budgeted resource supply and
expenses against actual spending.

Some specific
benefits associated with such an integrated cost system:

The procedure of updating process standards can be
automated - The integrated cost system filters the
data from the operational control system and when permanent changes in
capacity, efficiency, and input prices are detected, the system updates the
activity cost driver rates.

Managers can receive valuable information about capacity usage - The operational-control system can be
designed to detect developing resource bottlenecks and the system can then
flag the activity cost driver associated with these resources to alert
managers of the potential problems.

Differences in actual capacity and estimated capacity can
be detected - The operational control system might
detect when actual capacity differs from estimated capacity. This information
can be fed to the ABC system, enabling the necessary capacity adjustments to
be made, and thus producing a more accurate cost driver rate.

The question "Can the ABC and operational-control systems also be used to generate cost of goods sold and
inventory valuations for financial reporting purposes?" is also asked.
Cooper and Kaplan say "the answer is yes - but with precautions". They
say that the operational-control system captures actual expenses, and the ABC
system can be used to calculate standard product costs for costs of goods sold
and inventory valuation, but such systems will always report profits and balance
sheets that are different from those of the financial reporting system. Their
recommendation is that ABC be the primary cost-and-profit reporting system, and
that reconciliations required to make financial reporting conform with GAAP be
performed outside of the ABC system.

Managerial Accounting Comes of Age

There has been a
shift in emphasis from external reporting of numbers to internal understanding
of the company’s economics. In the past, managers had to struggle to obtain
information from financial accounting reports, but now the integrated managerial
systems distribute information to the financial accountants, who then reconcile
it for reporting purposes. They say that "information technology in the
form of enterprise systems promises to increase the relevance and contribution
of managerial accounting", but managers must be careful not to use ABC
systems for real-time operational control.

Conclusion

Separate but linked operational control and strategic costing systems will: